Chapter 2: Legal Concepts of the Insurance Contract
Estoppel
Estoppel is the legal process used to prevent a party from reclaiming a right or privilege that was already waived. Estoppel is a legal consequence of the waiver.
Indemnity contract
Health insurance is an indemnity contract. It only pays the amount equal to the loss. You're not allowed to make a profit.
In regards to representations or warranties, which of these statements is true?
If material to the risk, false representations will void a policy.
Implied authority
Implied authority is authority, not expressed or written into the agent contract, but which the agent is assumed to have an order to transact business of insurance for the principal. It comes from the Express authority, since not every single detail of an agent authority can be spelled out in the agent's written contract.
Exam tip
In an insurance contract, consideration (completed application in premium payments) is given by the applicant in exchange for the insurer's promise to pay benefits.
When must insurable interest exist for life insurance contract to be valid?
Inception of the contract
Insurable interest
Insurable interest is the most important aspect for establishing a legal insurance contract. To purchase insurance, the policy owner must face the possibility of losing money or something of value in a loss happens. This is called insurable interest. In life insurance, insurable interest must exist between the policy owner, and the person being insured at the time of application. Please note that insurable interest only needs to exist at the time of the original application, but does not need to exist throughout the remainder of the policy.
Aleatory
Insurance contracts are Aleatory, which means there is not an equal exchange of value. The premiums paid by the insurer small in relation to the amount that would be paid by the insurance company, in the event of a loss.
Aleatory
Insurance contracts are aleatory. This means there is an element of chance and potential for unequal exchange of value or consideration for both parties.
Conditional
Insurance contracts are conditional, because certain conditions must be met by all parties when a loss occurs, otherwise the contract would not be legally enforceable. Meaning if the policy owner is past due on his payments, and the insured dies. The insurance company does not have to pay the death benefit because a condition was not met.
Personal contract
Insurance contracts are personal contracts between an individual and the insurance company, and cannot transfer ownership without the insurance company's written consent.
Insurance interest
Insurance interest can be defined as the kind of financial interest a person must have in order to possess legally enforceable insurance coverage.
What is an insurance policy?
Insurance policies are legal contracts
Who are the two parties to an insurance contract?
Insured and Insurer
What is a void contract?
A contract having no legal force or binding effect.
Policy rider
A legal attachment amending a policy. Also called endorsement.
Agent
A person who acts for another person, or entity known as the principal with regard to contractual arrangements with third parties.
Policy
A policy is a written contract, and which one party promises to indemnify another against lost that arises from an unknown event.
Solicitor
A solicitor has the authority to seek insurance applicants for a company that does not have any authority to bind coverage on behalf of a company to a customer.
Warranty
A statement made by the applicant that is guaranteed to be true, and every respect
Representation
A statement made by the applicant that they consider to be true and accurate to the best of the applicants belief
Unilateral
A unilateral contract as a one-sided agreement. In which only one party, the insurance company, is legally bound to do anything. The policy owner is under no legally binding promise to pay premiums. However, the insurance company is legally bound to pay loss is covered by the policy. Please note: if the policy owner does not pay their premiums, the insurance company does have the right to terminate the insurance policy.
What is a voidable contract?
A voidable contract is an agreement that, for a reason satisfactory to the court, maybe set aside by one of the parties to the contract.
Waiver
A waiver is the act of voluntarily giving up a legal right, claim or privilege.
Warranty
A warranty is a statement that is considered guaranteed to be true.
What is an agent?
An agent is a licensed insurance producer, who's been appointed to represent an insurance company.
Exam tip
An insurance contract consists of two parties, the applicant and the insurer (company). The beneficiary and insured (if different from the insurer) are not parties of an insurance contract, and as such, do not have legal capacity.
Conditional
An insurance contract is conditional because the insurance promise to pay benefits depend on the occurrence of an event covered by the contract.
Legal purpose
An insurance contract must be legal and not against public policy. If an insurance contract has an insurable interest in the insured has provided written consent, it has legal purpose.
Offer and acceptance
An offer is made when the applicant submits an application for insurance to the insurance company. The offer is accepted when it has been approved by the insurance company's underwriters.
Apparent authority
Apparent authority is the appearance, or the assumption of authority, given based on the actions or words of the principal. For example, when an insurance company furnishes an agent, with a rate book, applications and sales literature, the insurance company cannot later deny that a relationship existed.
What is agent's authority?
As a representative of the insurer, agents are given certain authority to perform acts on behalf of the insurance company. In the insurance business, an agent is always considered to be acting on behalf of the insurance company, also referred to as the principal.
What arrangement allows one to bypass insurable interest laws?
Investor-originated life insurance. Investor-originated life insurance (or IOLI), sometimes called Stranger - originated life insurance (or STOLI) is used to circumvent state insurable interest statutes. This is done when an investor (or a Stranger) persuade an individual to take out life insurance specifically for the purpose of selling the policy to the investor. The investor compensates the insured, and makes the premiums, then collects the death benefit when the insured dies.
Gross negligence
Involves a reckless disregard for the need to act in a reasonable manner regardless of the potential for harm.
Willful and wanton negligence
Is considered even more severe
Stranger Oriented Life Insurance (STOLI) has been found to be a violation of which of the contractual elements?
Legal Purpose (Insurable Interest). A STOLI arrangement is used to circumvent state insurable interest statutes.
Rescission
Precision means the contract is made Noll and void
What is the consideration given by an insurer in the consideration clause of a life policy?
Promise to pay a death benefit to a named beneficiary.
Representation
Representations are statements believed to be true, to the best of one's knowledge, but they are not guaranteed to be true for insurance purposes. Representations are the answers. The applicant for insurance gives to the questions on the insurance application. Untrue statements on the application, or considered misrepresentations and could void the contract.
Negligence
Simple negligence is the failure to act and responsible or prudent manner. Gross negligence involves a reckless disregard for the need to act and responsible manner regardless of the potential for harm. Willful and wanton negligence is considered even more severe.
Stranger-Originated life insurance (STOLI)
Stranger-Originated life insurance transactions are life insurance arrangements were investors, persuade individuals typically senior citizens to take out new life insurance.
Express authority
The authority, a principal deliberately gives to his agent
Tort law
The concept of tort law is to provide for compensation for proved harm.
Simple negligence
The failure to act and reasonable or prudent manner
Concealment
Concealment is a legal term for the intentional with holding of information, which is crucial in making a decision. With insurance, concealment is withholding of information by the applicant that results in an in accurate underwriting decision, and can avoid the policy.
Consideration
Consideration is something of value that each party gifts to the other. The consideration on the part of the insured is the payment of premium. The consideration on the part of the insurance company is a promise to pay in the event of loss.
What is a contract?
Contract law defines a contract as a legally binding agreement between two or more parties, where a promise of benefits is exchanged for a consideration.
Concealment
Defined as the failure or neglect by the applicant to disclose unknown material fact when applying for insurance
A policy of adhesion can only be modified by whom?
The insurance company. (A policy of adhesion is best described as a policy which only the insurance company can modify.)
Apparent authority
The parents or assumption of authority based on the actions, words, or deeds of the principal
Parole evidence rule
The parole evidence rule prevents parties from changing the meaning of a written contract by trying to introduce oral or written statements, made before the formation of the contract.
Implied authority
The unwritten authority that is not expressly granted, but which the agent is assumed to have an order to transact business of the principal
Waiver
The voluntary giving up of a legal, given, right
The part of a life insurance policy guaranteed to be true is called a(n)
Warranty Warranties are statements that are considered literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.
What are the three types of authority?
express, implied, apparent
Valued Contract
pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.
Valued contract
pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.
Insurance policies are considered aleatory contracts, because
performance is conditioned upon a future occurrence. This means there is an element of chance and potential for unequal exchange of value or consideration for both parties. An aleatory contract is conditioned upon the occurrence of an event.
Statements made on an insurance application that are believed to be true to the best of the applicants knowledge are called:
representations
What happens when an offer is answered by a counter offer?
the first offer is void
Adhesion
Adhesion is also known as, "take it, or leave it "agreements, because they prepared by only one party, the insurance company. They are accepted or rejected by the other party, the applicant, with no negotiations or changes.
Aleatory
Aleatory means there is a potential for an equal exchange of value or consideration for both parties.
Competent parties
All parties must be of legal competence. Meaning, they must be of legal age, mentally capable of understanding the terms, and not under the influence of drugs or alcohol.
Express authority
Express authority is the authority granted to the agent by the principal, which is the insurance company, as written in the agency contract.
Example: E and F are business partners. Each takes out a $500,000 life insurance policy on the other, naming himself as primary beneficiary. E and F eventually terminate their business, and four months later E dies. although he was married with three children at the time of the death, the primary beneficiary is still F. However, an insurable interest no longer exists. Where will the proceeds from E's life insurance policy be directed to?
F. In this situation, the proceeds from Es life insurance policy will go to F. Insurable interest only needs to exist at the time of application.
Taking receipt of premiums and holding them for the insurance company is an example of:
Fiduciary responsibility
What are the four essential elements that must be contained in every contract for it to be legally valid and binding a.k.a. enforceable?
Offer and acceptance, consideration, legal purpose, and competent parties
What are the four essential elements to a legally binding insurance contract?
Offer and acceptance, consideration, legal purpose, competent parties
What four things does a contract need to have in order to be legally valid and binding?
Offer and acceptance, consideration, legal, purpose, and competent parties
Indemnity contract
One that pays an amount equal to the loss
Unilateral
Only one party a.k.a. the insurer makes any kind of enforceable promise
Who makes the legally enforceable promises in a unilateral insurance policy?
Under a unilateral insurance policy, the insurance company makes the legally enforceable promises.
What kind of contract is insurance?
Utmost good faith
Utmost good faith
Utmost good faith implies that they'll be no fraud, misrepresentation, or concealment, between the parties, as it pertains to insurance policies. Both insurance company and the policy owner must be able to rely on the other for relevant an accurate information. The policy owner is expected to provide accurate information on the application for insurance. The insurance company must clearly and truthfully, describe policy, features and benefits, and I must not conceal or mislead the insured.
What are the two types of insurance contracts?
Valued contract or indemnity contract
Warranties
Warrantees are statements that are guaranteed to be true, and are part of the legal contract.
Insurance applicants
are required to make a full, fair, and honest disclosure of the risk to the agent and insurer.
